Its resultant GDP growth — projected to average 4.1% through 2040, compared with 2.5% for the U.S. — has transformed dozens of consumer Web and mobile startups into exceedingly hot properties that stateside VCs are quietly yet aggressively trying to get behind.

Overall, more than $5 billion in private equity and venture capital has been invested in Brazil-based companies in the first three quarters of this year, more than double the $2.25 billion invested last year and the largest amount in the past decade, according to the Emerging Markets Private Equity Association.

“We haven’t made an investment yet, but we’re looking at half a dozen companies down there and seeing a lot of other VCs,” says Alex Ferrara, a partner in the Larchmont, New York, office of Bessemer Venture Partners. “The size of the economy and the rate at which it’s growing is pretty hard to ignore.”

Indeed, as a middle class emerges in Brazil — one with disposal income and an addiction to cell phones — “dozens” of businesses selling to them are beginning to reach “tens of millions of dollars” in annual revenue, according to Jon Sakoda, a partner with New Enterprise Associates.

One company that recently received funding is Locaweb, a São Paulo-based Web hosting company. Silver Lake took a minority stake in the company for an undisclosed amount in September. Others include social games makers Vostu and Mentez, both of which are jockeying to become the Zynga of Latin America.

Vostu, based in New York but with offices in São Paulo and Buenos Aires, closed up a $30 million round from Accel Partners and Tiger Global late last month. Mentez, a Miami-based company that has flourished in Brazil by focusing its games network on Google’s Orkut social network — which is far more popular locally than Facebook — raised an undisclosed amount of growth-stage financing from Insight Venture Partners in late August.

Expect that trend to continue in 2010, suggest VCs in the know. Venture capitalist Jeff Horing — who led Insight’s investment in Mentez and is wrapping up a second e-commerce deal outside São Paulo — calls startup activity in Brazil “a land grab in some instances. It’s all about who can get the territory faster.”

Adds Horing: “I’m sure Groupon wants to be in Brazil, but there are four guys there already with local market knowledge and the same kind of first-mover advantage that launched Groupon in the U.S.”

Copycats aren’t a problem for investors. Because there’s so comparatively little infrastructure, few incumbents exist in pretty much every type of business — including the business of money. Consider that by most estimates, the venture industry in Brazil has less than $100 million under management. Bargain shoppers know it, too. Horing estimates that VCs can currently pay anywhere from 25 percent to 50 percent less for a market leader in Brazil than for a Silicon Valley-based company with a similar growth trajectory, though “occasionally,” he adds, “you’ll see premier pricing.”

More, because money is tight, there’s a lot less confusion over which horse to back. “In the U.S., you might have a dozen companies doing the same thing,” says Sakoda of NEA. “In Brazil, there’s typically one clear leader and one fast follower. Once a company is taking advantage of the growth of ecommerce or Internet or mobile usage in Brazil and that market begins to take off, their revenues start growing pretty substantially.”

Of course, as more investors catch on to such advantages, they could disappear. Which is why VCs have been fairly tight-lipped about their interest in Brazil to date. Said one resentful VC, who asked not to be named, “I’m starting to see a lot of Boston-based firms that are struggling showing up [in Brazil].”

Another U.S. VC who asked to remain anonymous declined to name other firms he was seeing in Brazil. “I don’t think my friends want to be outed,” owing to growing competition, he explained.

Given the possibilities, it’s no wonder they’re feeling proprietary.

“We can’t forecast what we’ll do in 2011,” says Sakoda, “but we have a number of reasons to be optimistic about Brazil.”

2 Comments

AdAgeReader December 15, 2010

Not sure if this source is right, but it suggests Groupon has now entered Brazil and is already close #2 behind the leader (3.5M subs vs. 5M) so I’m not sure about Horing’s comment that the others have in insurmountable first mover advantage.

wow — i didn’t realize peixe urbano had grown quite so dramatically. and you might already know that most of these businesses are bootstrapped, but i’m told that’s typically the case in brazil, making their ability to run so efficiently their biggest lever when it comes to funding/valuations, i.e., we don’t *need* a pe partner: what are you going to do for us?